Saturday, December 1, 2007

OFFICE space in severe short supply now

OFFICE space may be in severe short supply now, but Citigroup predicts the tables will be turned by 2010 with even a glut possible.

‘The market is underestimating the potential supply of new office space in 2010 and beyond, in our view,’ said the banking group in a report on Monday.

While rents and prices of offices are skyrocketing due to the supply crunch, Citigroup said the situation is set to change in a few years, because of the slew of commercial sites sold by the Government in recent months.

It noted that since May, six new sites have been awarded that could yield three million sq ft of offices in 2010 and 2011. This is in addition to projects already under way.

It means that in those years, potential new supply could be 3.2 million to 3.5 million sq ft a year, according to Citigroup’s estimates.

Demand over the last few years has averaged only 1.5 million sq ft per year, the report added.

All eyes are now on the Government Land Sales programme for next year, which is due to be announced next month. If more office sites are released, even more supply can be expected.

Recent bids for office sites have already come in below market expectations, reflecting a more cautious long-term outlook among developers.

A Marina View site earlier this month attracted bids 35 per cent lower than those drawn by an adjacent plot just two months before. The site has yet to be awarded to a bidder even though the tender closed two weeks ago.

The Citigroup report also predicted that landlords of the new offices - most will be in the Central Business District - will face keen competition for tenants. Occupancy rates will peak next year or in 2009 and decline after that, it said.

This has led Citigroup to downgrade the shares of two major office owners: Keppel Land to ’sell’ and City Developments to ‘hold’.

But other analysts are sceptical of Citigroup’s forecasts of an oversupply. They say that for now and next year at least, demand for office space will still far outstrip supply.

When the new offices are opened from 2010 onwards, enough pent-up demand will have been built to soak up all the space, said Mr Wilson Liew, an investment analyst at Kim Eng Research.

‘Judging from the current demand, if this trend continues, there shouldn’t be much of an oversupply,’ he said. ‘These two, three years or so, the supply that is coming on stream is way below the average rate, so there will be a lot of pent-up demand.’

Mr Soong Tuck Yin of Macquarie Securities said the average supply of offices between next year and 2012 comes to only 1.7 million sq ft a year.

This drops to 1.4 million sq ft if space that has already been pre-committed - leased by companies even before being built - is excluded.

Another analyst added that in three to five years’ time, Singapore’s two casinos will have been built. And with the Government promoting Singapore as a financial hub, banks will still expand and be in need of prime space.

There may also be a delay in some of the new office space coming on stream, given the current shortage of contractors, he added.’It’s a bit soon to be making these sorts of predictions,’ the analyst said of the Citigroup report.

In the end, it boils down to whether the economy keeps growing, said Mr Winston Liew, senior investment analyst at OCBC Investment Research. ‘The office market is mainly driven by GDP growth. If our GDP continues to grow, demand should not be an issue.’